UK SME Outlook: Bump in the Road or Heading for a Pothole?
Last week, the UK economy managed to surprise us all with modest 0.7% GDP growth. It’s a figure that brought a flicker of optimism (however fleeting) for businesses worn down by years of instability. But scratch beneath the surface, and the message from our clients across the South is crystal clear: uncertainty remains.
A False Dawn: Recovery That Lost Its Way
The first half of 2024 gave many the impression that the worst was behind us. Inflation was falling, GDP forecasts were rising, and political clarity returned after Labour’s landslide victory. For a moment, businesses dared to plan again.
But come summer, the mood shifted. The government’s persistent reminders of “the fiscal mess they inherited” did little to inspire confidence. In fact, the talk of looming tax rises had an immediate chilling effect.
Across our client base, we saw a spike in Members’ Voluntary Liquidations (MVLs) as shareholders moved early to protect wealth from the expected tax grab. While the budget proved slightly less brutal than feared, the uncertainty itself had already done the damage.
The October Budget: A Costly Affair
When the budget finally arrived, it brought a host of unwelcome surprises:
- A 1.5% rise in employer National Insurance contributions
- An increase in Business Asset Disposal Relief (BADR) from 10% to 14% on the first £1m with more to come
- Further hikes in the National Living Wage
- New employment rights with more compliance requirements
The impact? Businesses hit the brakes. Investment paused. Payroll plans scrapped. Some firms shelved growth strategies altogether in favour of survival.
GDP growth may have eked out 0.7% in Q1 2025, but confidence is another matter entirely.
Inflation: The Underrated Threat
April 2025 has brought a nasty surprise: inflation leapt to 3.5%, its highest level in over a year, driven by rising household bills, particularly gas and electricity.
More worryingly, we’re now seeing evidence of “greedflation”. This is where some companies (notably global brands) use inflation as a shield to justify bigger price hikes than necessary. Apple, for example, has faced backlash for hiking product prices while margins remain healthy.
But for SMEs, this game is riskier. You’re walking a tightrope: raise prices to protect margins, and risk losing customers. Absorb costs, and your cash flow bleeds. Either way, inflation is squeezing you hard.
Cash Flow and Credit: The Balancing Act
Although overall SME debt has fallen from £202bn (2020) to £171bn (2024), cracks are reappearing. The last quarter of 2024 saw the first rise in SME borrowing since the pandemic; a worrying sign that operational cash flow isn’t cutting it.
Lenders are also changing. High street banks are risk-averse, focusing on larger borrowers. Many SMEs now rely on alternative lenders, who typically require stricter financial discipline and better reporting, and cost more.
If your business isn’t already producing robust management accounts and forecasting cash flow monthly, you’re already at a disadvantage.
HMRC Turns Up the Heat
Another noticeable shift is the sharp uptick in enforcement activity from HMRC. Time-To-Pay (TTP) arrangements, once seen as a flexible lifeline, are now rigid and aggressively policed.
The message is clear: if you’re in arrears with HMRC, engage early and stick religiously to your agreed terms.
Two rules:
- If you’ve got a TTP, stick to it like glue.
- If you’re negotiating one, don’t overpromise. Be realistic and get advice if you need it. Then see rule one.
The Employment Squeeze
Even though unemployment is still relatively low, the labour market tells a darker story. Job vacancies have now fallen for 34 consecutive quarters. Many SMEs have either frozen recruitment or initiated redundancies.
In some sectors, it’s even worse. We’re seeing early signs of “zombie” businesses quietly folding, rather than mounting costly turnaround attempts. For many, it’s no longer about fixing the model, it’s about knowing when to bow out gracefully.
Currency, Credit Ratings, and the Global Backdrop
The UK isn’t operating in a vacuum. Globally, the economic tone remains jittery. Moody’s downgraded the US government’s credit rating on Friday night when most US traders were in the bar, sparking a drop in the Dollar index and fuelling fears about long-term fiscal sustainability. Moody's joined S&P and Fitch in taking away their top-rating for the US whilst moving the outlook from stable to negative.
Meanwhile, inflationary pressures in the US and EU echo many of the same issues we face in Britain.
These events impact trade, investment flows, and the confidence of lenders and investors alike. For SMEs, that makes international trade riskier and foreign exchange volatility more pronounced. Hedging strategies are no longer optional.
So What Should UK SMEs Be Doing?
- Review Pricing Models - Understand your true cost base. Are your price increases aligned with actual cost inflation, or are you undercharging and eating margin?
- Cash Flow Forecasting - Plan for the worst. Forecast at least six months ahead, stress-testing against slower sales or unexpected costs.
- Debt Management - Evaluate your borrowing structure. Are you on the right terms? Could you refinance to improve headroom?
- HMRC Strategy - Stay proactive. Don’t wait for the brown envelope. Communicate early and often if you’re under pressure.
- Scenario Planning - What’s your plan if interest rates rise again? Or if customer demand drops 20%? Work through different outcomes now, not later.
Self-Test: Four Questions Every SME Owner Should Ask
- Have we reassessed our pricing in the last 90 days to reflect real cost changes?
- Are we producing monthly cash flow forecasts, and do they include worst-case scenarios?
- Do we have a clear plan in place if access to credit becomes more restricted?
- Is our team equipped to handle an HMRC challenge or compliance investigation?
Final Thought: Stay Ready, Not Reactive
The lesson of the last 18 months is that waiting for “stability” is a losing strategy. The businesses that thrive in uncertain times are those that take control: of their finances, their strategy, and their risks.
If you’re unsure whether your business is on firm footing for the rest of 2025, Branta can help. From debt advisory and equity funding to restructuring and sale preparation, our team is here to give you clarity and confidence.
📧 Contact us at info@branta.co.uk
📞 Or call us on 023 8214 8216
